Britain's prized AAA rating under threat as S&P issues stark warning

Britain has moved a step closer to losing its prized AAA rating after a
leading ratings agency downgraded the country's outlook because of the
deteriorating state of the public finances and political uncertainty over
how to repair them.

Ratings agency Standard & Poor's lowered the outlook to negative from stable. A lower rating would mean that S&P believes Britain is no longer fit to be in the club of top creditworthy nations, undermining its critical ability to borrow cheaply on financial markets.

The move by S&P came minutes before figures showed that the Government's budget deficit hit £8.5bn in April, the most for that month since records began.

Although S&P said lowering the UK's outlook to negative "does not necessarily precede a rating change", it added that the UK has a one in three chance of an actual cut in its ratings.

A ratings cut would be damaging for the economy, pushing up the cost of borrowing for the Government, which would then feed through to higher taxes and higher interest rates nationwide.

In a stark warning, S&P said that it would consider lowering the UK's top-tier AAA if the next Government does not take radical measures to reduce the scale of public debt.

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"The rating could be lowered if we conclude that, following the election, the next Government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory," said David Beers, primary credit analyst for Standard & Poor's.

Mr Beers also cast doubt on the Chancellor of the Exchequer's Budget forecasts, saying that the Government's debt burden could approach 100pc of GDP by 2013 – and stay at that level in the medium term.

At its peak in 2013, the Government is forecasting debt at 79pc of GDP, but the ratings agency believes that the Government has not sufficiently recognised that the UK's public finances are "deteriorating rapidly".

Last November, Frank Gill, Standard & Poor's director of European sovereign ratings, said public debt above 60pc of GDP could undermine an AAA rating.

"Our projections reflect our more cautious view of how quickly the erosion in the Government's revenue base may be repaired, the extent to which the growth in Government spending can be curtailed and consequently the pace at which historically high fiscal deficits are likely to narrow," Mr Beers said.

Ratings agencies, such as Moody's and Standard & Poor's, have been reviewing the UK's status in light of the Chancellor's revelation in the Budget that national debt will reach £1.4 trillion over the next five years. Spain, Ireland, Greece and Portugal have already been downgraded.

Stuart Cheek, head of UK Government bonds at BGC Partners, said "it's big news," he said. He added that "it should be noted that this is the same rating agency that rated leveraged sub-prime as AAA."